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Published: Mon, 5 Dec 2016

GST or the Goods and Services Tax is an indirect tax that brings together most of the taxes that are imposed on all goods and services (except a few) under a single banner. This is in contrast to the current system, where taxes are levied separately on goods and services.

The GST, however, is a comprehensive form of tax based on a uniform rate of tax for both goods and services. However, the GST is payable only at the final point of consumption.

How will it work in India?

The GST was first mentioned in India during the 2006-2007 budget and the latest budget too includes the need to take steps to make the implementation possible by April 1, 2010. Given the federal nature of the country, GST in India is expected to take the form of a dual GST including both a Central and a state GST.

The Empowered Committee of the State Finance Ministers has been given the responsibility for creating a model and a roadmap for the GST. While there is very little clarity at present, it is expected that the central GST will subsume excise duty and service tax and the state GST may replace the VAT.

What are the benefits of the GST?

At the simplest level, the GST reduces the number of instances where taxes need to be paid thus reducing the possibility of manipulation on the part of tax authorities and is hence assumed to be a much transparent mode of administering taxes. It will alleviate the burden of cascading taxes for individuals. It is also expected to boost revenue collection in certain states and to reduce the prices of goods.

What are the difficulties involved?

The fundamental problem involved is the decision of a revenue-neutral rate for the GST that will be acceptable to all those involved and also whether there will be a single rate or two rates at state and Central level. The federal nature of the country also accounts for its own share of complications and delays. For the Centre to be able to impose tax at the retail level and for states to be able to tax services will require constitutional amendments, which will further need to be passed by the Parliament and state legislatures.

GST for ‘sin’ products will benefit the economy

By bringing alcohol within the ambit of GST, both the states and the Centre would be empowered to levy tax, states though may be reluctant to accept this jurisdictional encroachment by the centre

The so-called sin products, such as alcohol and tobacco, are singled out for taxation at high rates in virtually all jurisdictions around the world. The high rates serve the double purpose of yielding extra revenues to the government and discouraging consumption of such products, which are harmful to health.

In India also, these products attract high and multiple taxes in the form of excise duties, licence fees, cess, inter-state import and export fees, and bottling fees. Should these products then be left out of the ambit of the goods and services tax (GST)? If not, how would the tax be structured for them?

The blueprint for GST prepared by the empowered committee of state finance ministers suggests that, following the current practice under the state value-added tax, or VAT, these excisable products, including petroleum, would remain outside the scope of GST. While the reasons for this treatment are not fully articulated, it is contrary to international best practices and warrants reconsideration.

Their exclusion from GST would mean that manufacturers and producers of the excluded products would not be able to claim a credit for GST paid on capital equipment, raw materials and other inputs acquired for use in their production. This would lead to tax cascading and other economic distortions which GST is designed to eliminate.

It would also create complexity in administration and compliance. For example, a restaurant serving alcohol with meals would be required to split the charge for alcohol, and apply GST to the balance of the invoice. If the restaurant were to buy a refrigerator for storing alcohol as well as fruits, vegetables and other food items, it would be required to apportion the use for storing alcohol and reverse the credit claimed for the refrigerator.

One possible reason for their exclusion could be the taxation of these products at rates substantially higher than GST rates. However, application of GST does not mean a reduction in their overall tax burden. The international practice is to apply excise duties on such products over and above the standard GST. The excise duties can be set at an appropriate level to yield desired revenues from the sector, regardless of the GST rate.

Thus, if the total effective tax rate on a product is to be 50%, and the standard GST rate was 15%, the excise duty could be set at approximately 35%. The exact rate would vary depending on the trade level (manufacturer or distributor) at which it was to be levied.

A second reason for their exclusion could be to limit their taxation at the production stage, where the collection of tax could be better monitored and enforced.

GST applies at all points in the supply chain and there is a risk of significant leakage if the collection of taxes on such highly taxed products is shifted to smaller dealers and retailers. Again, such risks can be managed by leaving the application of the excise duty at the production stage, while collecting GST at all points in the supply chain. In the example above, the bulk of the revenues would come from the 35% excise duty, which would be collected at the first point of sale, which could be the sale by the producer or, in the case of imports, by the distributor or importer.

A third reason could be to deny the input tax credit in respect of such sin products when they are acquired as business inputs for entertaining clients or owners and shareholders. Under GST, businesses are allowed to claim a credit for the tax paid on the purchase of the products acquired as raw materials or other inputs for further manufacturing and processing or for resale. However, it may not be appropriate to give credit for the tax paid on sin products such as alcohol and tobacco when they are acquired for entertainment.

This concern can be met in two ways. First, if the total tax on the products is split into an excise duty and GST, no credit would be allowed for the excise duty. A credit is to be allowed for only GST paid on the inputs. Second, even the credit for GST can be denied, except where these products are acquired as raw materials or for resale. Many countries disallow credit where tobacco or alcohol is acquired for entertaining business clients or for use by business owners or employees. Similar restrictions apply to credits in respect of meals, sports, entertainment, diesel, petrol and automobiles.

Yet another reason for the exclusion of these products from GST could be to keep their taxation within the exclusive domain of the states. This reason is applicable mainly to alcohol.

Currently, the powers for regulation and taxation of alcohol are vested exclusively in the states. By bringing alcohol within the ambit of GST, both the states and the Centre would be empowered to levy tax. States may be reluctant to accept this jurisdictional encroachment by the Centre.

But GST will entail substantial realignment of taxation powers, allowing both levels of government concurrent powers to tax all goods and services. States will be empowered to levy tax on services, and the Centre would be allowed to levy tax beyond the stage of manufacturing at all points in the supply chain. There is little justification to exclude certain sectors or products from this arrangement. The power of regulation of alcohol could still be left to the states, while allowing the Centre and the states concurrent taxation powers under this arrangement.

Full benefits of GST may not be realized if it is not levied in a comprehensive manner to all goods and services. Tax compliance in both the tobacco and alcohol sectors is far from satisfactory, and leakages are believed to be substantial.

Extension of GST to these products would reduce tax cascading and allow enhanced tracking of their movement, greater transparency in their taxation, and improved tax compliance: a win-win situation for the economy and the governments.

Harmonizing GST laws is essential

The central sales tax is a useful model; states enjoy the risks and rewards of tax ownership

The replacement of state sales tax by the value-added tax (VAT) in 2005 was considered a significant step forward in the reform of domestic trade taxes in India.

The state VAT design was based largely on the recommendations of the 1994 report of the National Institute of Public Finance and Policy, led by the late Amaresh Bagchi. In recommending a state VAT, the Bagchi committee report recognized that it was not a perfect solution but was a feasible option within the framework of the Constitution and would lay the foundation for an even more rational regime in future.

The Centre and states have now embarked on implementing this more rational regime, in the form of a dual goods and services tax (GST), to be levied concurrently by both levels of government.

A dual structure would mean that there would be a central GST and a state GST, each levied on a comprehensive base comprising both goods and services. Thus, a transaction would attract both taxes.

Ideally, both taxes should have been merged into a single national GST, with an appropriate sharing of revenues between the Centre and states. However, given the federal structure of the Constitution, a dual GST is a political necessity.

It is essential that the GST laws are harmonized between the Centre and states, and among states. This will simplify compliance, reduce administration costs and improve revenue collections: a win-win for governments and taxpayers.

There are several dimensions to harmonization-tax base and rates, tax administration and tax legislation, and rules and procedures.

It is essential that the base for the tax covers both goods and services in a seamless manner and is uniform throughout the country. Under the best international models, GST is levied on all supplies, whether of goods, services, real property, intangibles, or any combination of these. Moreover, the tax applies at all points in the supply chain.

The current division of tax base under the Constitution between an exclusive Centre list and an exclusive state list is archaic and no longer tenable in India’s modern economy. The Constitution needs to be amended to give both levels of government concurrent powers to levy tax on all supplies, with the proviso that the state tax would be restricted to supplies for consumption within that state.

Application of tax on a comprehensive base would automatically ensure uniformity of the base between the Centre and states, and across states. Under VAT, states have exercised their fiscal autonomy to deviate from the common base agreed to by a committee of state finance ministers. Such deviations are unfortunate and should be resisted.

As regards the tax rate, two primary tax rates are contemplated-a standard rate and a lower rate applicable to food and other specified necessities. While a lower rate for food may be inevitable on social, economic and political grounds, it runs the risk of seriously compromising the objective of base harmonization.

New Delhi: Implementation of the proposed Goods and Services Tax (GST) and opening up of FDI will fuel the growth of FMCG sector in India by taking the total size of industry to Rs4.5 lakh crore ($95 billion) by 2018, according to a Ficci-Technopak report.

FMCG sector has grown consistently during the last three to four years and has reached the level of Rs1.25 lakh crore ($25 billion) sales in 2008, the report said.

Even without the FDI and GST, the industry is poised to grow at 10-12% for the next 10 years to reach Rs2.06 lakh crore by 2013 and Rs3.55 lakh crore by 2018, it pointed out.

“Demand from the rural areas would be instrumental in fueling the growth of FMCG companies in India,” Ficci general secretary Amit Mitra told reporters while releasing the report.

Opening up of FDI and implementation of GST in India will further boost the sector, which may take the size of the industry to 4.5 lakh crore by 2018, Mitra said.

The study also urges the government to enforce trade mark and copyright laws to drastically reduce counterfeits, and protect the rights of the consumers and FMCG companies.

Speaking about the potential of the sector, Mitra said, it is among the largest employers in India and livelihood of 13 million people associated with 8 million ‘kirana´ stores are directly depended on it.

New Delhi: Implementation of India’s most ambitious tax reform, the goods and services tax (GST), could start on 1 April, 2010, even if all the states do not come on board, finance minister Pranab Mukherjee said on Tuesday.

Admitting that implementing GST won’t be easy, Mukherjee said the chairman of the empowered committee of state finance ministers Asim Dasgupta had assured him that the differences among states could be resolved. “I know there is a problem. As in VAT (value-added tax), some (states) did not join us. It may happen in this case,” Mukherjee told a gathering of industrialists, referring to the possibility of GST being rolled out in April 2010 without all states coming on board.

VAT, the precursor to GST, was introduced in January 2005 without a couple of large states such as Tamil Nadu and Uttar Pradesh signing on initially. Recently, the Tamil Nadu government has expressed reservations about the April 2010 deadline for GST, terming it premature.

‘As in VAT, some (states) did not join us. It may happen in this case (GST).’

GST aims to demolish tax barriers between states and fiscally unify India through a uniform tax rate and policy across states. The benefits are expected to be lower rates and a business environment where tax policies do not have a disproportionate influence on decision making.

Other than Tamil Nadu, Madhya Pradesh and Chhattisgarh are two states, both ruled by the Bharatiya Janata Party, which have reservations about a switch to GST.

Mukherjee, who has expressed the intention to periodically engage states on GST, said he would try to get all states on board before the April 2010 deadline. “I will use my persuasive power.”

On Tuesday, in a separate meeting with reporters, revenue secretary P.V. Bhide said the Union government would be comfortable with a GST rate which would give it the same amount of revenue that central excise and service tax give it today. In 2009-10 Budget estimates, excise and service tax together are estimated to yield the Union government about Rs1.71 trillion. Of that amount, a part devolves to states according to the tax sharing formula fixed by the 12th Finance Commission.

In the same meeting, finance secretary Ashok Chawla said the government hoped to raise anything between Rs3,000 crore and Rs3,500 crore this fiscal through the sale of some of its equity in National Hydroelectric Power Corp. Ltd and Oil India Ltd.

The proceeds from the sale are currently transferred to a National Investment Fund (NIF) and the government is allowed to use a part of the income generated from NIF for social sector spending. This mutes the impact of disinvestment when it comes to meeting the government’s current spending. Currently, the government is working on changing the rules of NIF to allow the entire money generated from disinvestment for social sector spending.

As the decision to create the NIF was taken by the cabinet committee on economic affairs of the erstwhile government, a decision to change the rules has to be taken by the same committee of the current government, Chawla said.

New Delhi: The Thirteenth Finance Commission on Monday suggested that activities like housing, construction and railways should be included in the proposed goods and services tax (GST) to increase the tax base and enhance collections.

“I would urge that the construction and housing sectors be included in the GST tax base, either immediately or during a subsequent phase,” said commission chairman Vijay Kelkar while speaking at a seminar on GST organized by Assocham.

He added, construction sector is a significant contributor to the national economy and housing expenditure dominates the personal consumption expenditure so the two sectors would increase the tax base.

“Another possible step to expand the GST tax base will be the inclusion of the rail sector,” he said.

The inclusion of the the railway sector in the tax regime which will do away with most of the indirect taxes, should be done if the government want to provide a level playing field to road and air transportation sector.

The inclusion will also ensure that all inter-state transportation of goods can be tracked through the proposed IT network and in fact the railways itself would benefit from the inclusion, Kelkar said.

The government is preparing a raodmap for GST which has to be implemented by 1 April 2010.

However, there is no full consensus on the rates of GST and the structure but the government has made it clear that there would be a dual tax structure.

This means there would be two components of tax, one called the Central GST and the other the State GST.

New Delhi: Asking the state finance ministers to resolve the pending issues expeditiously, the Centre today said that introducing Goods and Services Tax (GST) was critical for economic reforms.

“We also need to focus on the introduction of GST from 1 April, 2010. This is a critical part of our economic reforms,” finance minister Pranab Mukherjee said while addressing a conference of state finance ministers.

Requesting the chief ministers and state finance ministers to resolve the pending issues expeditiously, Mukherjee said: “As in the case of VAT, the Centre continues to play the role of a facilitator for GST also.”

The new tax system GST is expected to replace most indirect taxes at the central and state levels.

Mukherjee further said that as the states had agreed on eliminating double benefits under the VAT and Central Sales Tax (CST) compensation packages, the central government has issued relevant circulars.

The Centre had earlier agreed to compensate the states for loss of revenue following the implementation of VAT and gradual reduction of CST rate.

Calling upon the states to focus on Aam Aadmi, Mukherjee said: “We have to ensure that the growth process is not only accelerated but also made inclusive. We need to give full attention to sectors like infrastructure, agriculture, employment generation etc.”

Raising concern over deterioration of the centre’s fiscal deficit which soared to 6.2% of GDP in 2008-09, Mukherjee said: “High levels of fiscal deficit are not sustainable in the medium to long term, both for the states and the centre.”

Making a case for brining back the economy on higher growth trajectory without fiscal profligacy, he said: “We have to resume the process of fiscal consolidation at the earliest.”

Referring to the 6.7% growth rate during 2008-09, the minister said: “India is the second-fastest growing economy in the world,” adding: “Moreover the recent performance of the core sector industries, including crude oil, coal, cement and steel, during April 2009 gives us further confidence of bringing back the economy on growth path.”

Recalling the social sector initiatives taken by the central government to make the growth more inclusive, Mukherjee said that the cabinet secretary would be holding periodic video conferences with the chief secretaries to monitor the progress of the schemes.

The government on Monday announced the final roadmap for implementing a countrywide goods and services tax (GST) from April 1, 2010. It is one of the most comprehensive tax reforms initiatives in independent India.

“Tax reform, like all reforms, is a process and not an event. We have accelerated the process for the smooth introduction of GST with effect from April 1, 2010,” Finance Minister Pranab Mukherjee said in his budget speech.

Although the GST rate is yet to be decided, experts believe it could be around 14 per cent.

“It can pave the way for modernisation of tax administration, make it simpler and more transparent, and significantly enhance voluntary compliance,” said Satya Poddar Tax Partner, Policy Advisory Group, Ernst & Young.

The indirect tax system in India is currently mired in multi-layered taxes – such as excise duty, octroi, CST, value added tax (VAT) and service tax among others – levied by the Centre and state governments. These cause distortions in the tax regime and lead to huge leakages.

Once implemented, GST is expected to remove these distortions, as most of these taxes would be replaced by it.

About 150 countries across the world have introduced GST in one form or the other. The GST rate in various countries ranges from as low as 5 per cent in Taiwan to as high as 25 per cent in Denmark.

The implementation of GST would also require a constitutional amendment and will also require the endorsement of the state assemblies.

GST system in India by April 2010

In the conference of the State Finance Ministers, the Finance Minister Mr. Pranab Mukherjee has proposed the state finance ministers to work over on the delayed issues of the tax. The Central introduces the Goods and Services Tax (GST) which is one of the most critical parts of the economic reforms of the country.

Mr. Mukherjee has proposed in the conference of the State Ministers “GST will be the main motive of focus from April 1, 2010. It is one of the most critical parts of the country’s economic reform.” Mr. Mukherjee also added “the central will continue to play a major role in the affairs of Value Added Tax (VAT) as well as it will remain an active catalyst in the GST.” Through the new tax system GST many indirect taxes are going to get exchanged at the state and central levels.

The Central Government has published affluent essential circulars regarding the eradication of double benefits under the VAT and Central Sales Tax (CST) compensation packages which has been duly agreed by the states. Previously compensation has been incurred on the loss of revenue on the implementation of VAT and gradual reduction of CST rate to the states by the central. “Aam Aadmi” the word used by the finance minister towards the citizens of the country. He said that the states priority should be in looking towards the growth of the sectors like infrastructure, agriculture, employment generation etc.

The apprehension of the central has risen by viewing its corrosion over the financial discrepancy that has soared up to 6.2 percent of GDP in 2008-2009. Mr.Mukherjee expressed his views by adding that the huge levels of financial incongruity are absolutely non-sustainable from the medium to the long term process of the states as well as for the central.

An essential step is required to boom up the economic higher growth as soon as possible without any kind of fiscal licentiousness.

By realizing the fact about 6.7 per cent growth rate during 2008-09, the Finance Minister said “India is rising as the second-fastest growing economic country in the world.” Furthermore, he said, the core sector industries, as well as crude oil, coal, cement and steel, during April 2009 have made a great mark on the economic graph “which has provided an assurance to bring back again the economy on the way of expansion.”

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